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US chipmakers hit by sudden downturn after pandemic boom
By: Financial Times | August 17, 2022

• Intel, Micron set to cut capital spending despite new law aiming to boost production.

Nvidia, the biggest maker of graphics processing units, or GPUs, used in video graphics and machine learning systems, last week pre-announced an even bigger revenue miss, as sales of its gaming chips fell 44 percent from the preceding quarter. And Micron, one of the largest makers of memory chips, said its free cash flow was likely to turn negative in the next three months, after averaging $1 billion in recent quarters.

The stresses have also been felt throughout Asia. Late last week, the chief executive of Chinese chipmaker Semiconductor Manufacturing International Corporation said demand had slowed from smartphone and other consumer electronics makers, with some stopping orders altogether. A month before, Taiwan Semiconductor Manufacturing Company said it was expecting an inventory correction that would last until late next year.

The abrupt slide has left chipmakers in the US trying to manage a decline at the very moment that they were laying the ground for a huge increase in production because of the $52 billion in government support provided by this month’s Chips Act.

On the same day that Congress passed the law, Intel, which is expected to be the biggest beneficiary of government grants, sliced $4 billion from its capital spending plans for the rest of this year, although it said that it was still committed to a “strong and growing dividend” for its shareholders.

Meanwhile, Micron, which celebrated President Joe Biden’s signing of the legislation last week with the announcement that it planned to invest $40 billion in the US by the end of the decade, was forced just a day later to say it would cut its capital spending “meaningfully” next year because of the downturn.

For now, most chip supply chain experts predict a relatively shallow downturn, provided that the global economy is heading for a soft landing. But the speed with which things have turned has left them scrambling to understand the complex dynamics at work.

Gartner, which had been expecting the growth in global chip sales this year to halve from 2021’s 26 percent, took its forecast down further to 7 percent and is now predicting a 2.5 percent contraction in 2023 to $623 billion.

For now, Wall Street has taken the news in its stride. The Philadelphia semiconductor index, which comprises the 30 largest US companies involved in the design, manufacture, and sale of semiconductors, fell back almost 40 percent as the stock market corrected this year after rising three-fold following the early pandemic stock market slump. But since early July, despite mounting evidence of the chip slowdown, the index has rebounded 24 percent.

On Monday, Nvidia’s shares climbed back above the level they were trading at before its earnings disappointment, even though it disclosed a savage 17 percent shortfall in revenue compared with earlier expectations.

But after the severe inventory and supply chain stresses of the past two years, few analysts are confident that they can judge how an economic slowdown will feed through the industry. Hopes that the slide would be largely restricted to the PC and smartphone markets have already been dashed.

While a collapse in demand in the gaming market was the main cause for Nvidia’s earnings disappointment, the US chipmaker also said its sales of data center chips had only risen 1 percent from the preceding three months, compared with Wall Street expectations of closer to 10 percent. It blamed supply shortages rather than falling demand, although other indications, including a fall-off at Intel, have fed the suspicion that the booming cloud computing market has cooled rapidly.

In recent days, the signs of retrenchment have broadened. Micron finance chief Mark Murphy said last week that industrial and automotive customers were the latest to cut their chip purchases.

“It’s a very recent development,” he added, making it too early to tell whether these customers are simply making an adjustment after a rapid inventory build-up, or whether they are responding to falling demand from their own customers.

Either way, according to Murphy, the result has been the same: “We’re seeing clear signs of weakness in those markets.”

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